Some Types of “Student Loans” May Be Discharged in Bankruptcy

New ruling may help ditch some kinds of student loans

Image Source: Flickr User Raymond Bryson

Ask anyone and they'll tell you that student loans cannot be discharged in bankruptcy. This is not entirely true. In fact, the government has recently loosened up standards on discharging federal student loans, but it is by no means a slam dunk. But there is another type of “student loan” that you may be able to discharge more easily in bankruptcy thanks to a recent court ruling in San Francisco, CA.

What student loans should be easier to discharge now?

Loans to graduate students or graduating students to cover expensive test prep programs will be affected by this California ruling, and it can be used in other circuits to appeal for a discharge of this debt. The debt in question was a $15,000 bar study loan. It was a loan made to a recent law school grad who used the money to pay for her prep test expenses and cost of living while she was studying for the rigorous exam. Her attorney argued for discharge under an Adversary Proceeding and won.

Student loans that are not student loans by law

When the newly minted lawyer's attorney filed her Chapter 13, they listed the bar study loan among unsecured debts to be fully or partially discharged as part of her bankruptcy. However, the lender filed an objection to the case insisting that the bar study loan was a “student loan” and was not eligible for discharge. While it's true the loan was made while the debtor was a student, her lawyer contended that it was not a student loan for the following reasons:

• The loan did not cover the cost of attending a Title IV institution
• The loan was used to pay for a course with a private bar exam preparation firm
• The loan was not used to pursue an academic degree, but a professional license

What the case means to North Carolina consumers

This California case was not a big win in a hard-fought case. In fact, after the debtor's lawyer filed the objection to their objection, the creditor went away quietly without pushing the matter further. Because the judge issued a default judgment based on the creditor's failure to respond, it's not much of an earth-shattering, precedent-setting case. But what does emerge from this (albeit minor) victory is that you should fight back if you have a “student loan” like this in your debt backlog when you file bankruptcy.

In addition to loans to study for the bar exam, you may have financed a CPA study course or borrowed to help finance your preparation for your medical boards. If you have any other debt that was taken on to pay for test or certification prep that wasn't part of Title IV institution coursework, discuss this with your bankruptcy attorney when you come in for your consultation. If they haven't heard of this case, it's McGinnis v. Citibank (Northern Bankruptcy District of California, Case Number 12-03111).

Are standard student loans dischargeable in bankruptcy?

The short answer is yes, depending on your circumstances. If you fall into one of the following categories, your attorney may be able to file an Adversary Proceeding to get your federal or private student loans discharged in bankruptcy:

• If you are significantly and permanently disabled
• If you are impoverished, and this is not likely to change
• If the school went out of business while you were attending
• If you are ineligible to work in the profession for which you studied
• If you have an ongoing illness that prevents you from working

To find out more about debt relief in North Carolina, contact the Law Offices of John T. Orcutt. Call +1-833-627-0115 today for a free bankruptcy consultation in Greensboro, Raleigh, Wilson, Durham, Fayetteville or Garner.